Lease
Calculator

The IFRS 16 lease liability is the present value of future lease payments not yet paid at the commencement date (IFRS 16.26). It's calculated by discounting each future lease payment using the interest rate implicit in the lease, or if that rate can't be readily determined, the lessee's incremental borrowing rate (IBR). Lease payments include fixed payments less incentives receivable, variable payments linked to an index or rate, residual value guarantee amounts, purchase option exercise prices if reasonably certain, and termination penalties if the lease term reflects termination.

Use the interest rate implicit in the lease if it can be readily determined. If not (which is the case for most leases), use the lessee's incremental borrowing rate (IBR): the rate of interest that the lessee would have to pay to borrow over a similar term, with similar security, the funds necessary to obtain an asset of similar value in a similar economic environment (IFRS 16.26(d)). The IBR is entity-specific and should reflect the entity's credit standing, the lease term, the currency, and the nature of the security.

Payments in arrears are made at the end of each payment period, while payments in advance are made at the beginning. This distinction materially affects the present value calculation. Payments in advance result in a higher lease liability because the first payment isn't discounted. The formula for an annuity in advance multiplies the standard PV annuity factor by (1 + r), where r is the periodic discount rate. Most commercial leases require payment in advance (rent due at the start of each month).

The ROU asset is initially measured at cost (IFRS 16.23), comprising: the initial measurement of the lease liability, plus any lease payments made at or before commencement less any lease incentives received, plus initial direct costs incurred by the lessee, plus an estimate of costs to dismantle and restore the underlying asset (IFRS 16.24). The ROU asset is subsequently depreciated on a straight-line basis over the shorter of the asset's useful life and the lease term, unless ownership transfers or a purchase option is reasonably certain to be exercised.

IFRS 16.5(a) permits a lessee to elect not to recognise a right-of-use asset and lease liability for short-term leases: leases that, at the commencement date, have a lease term of 12 months or less. The assessment includes any extension options the lessee is reasonably certain to exercise. If the short-term exemption is applied, lease payments are recognised as an expense on a straight-line basis over the lease term. The election is made by class of underlying asset.

IFRS 16.5(b) permits a lessee to elect not to recognise leases where the underlying asset is of low value. The IASB's Basis for Conclusions (IFRS 16.BC100) indicates a threshold of approximately US$5,000 or less when the asset is new. The assessment is based on the value of the asset when new, regardless of the age of the asset or the size of the lessee. Typical qualifying assets include laptops, tablets, small office furniture, and desk phones. The exemption applies on a lease-by-lease basis.

Rent-free periods at the start of a lease are included in the lease term, but the payments during those periods are zero. The lease liability is the present value of all payments (including the zero payments during the rent-free period and the actual payments thereafter). Interest accrues on the lease liability during the rent-free period, increasing the liability. Depreciation of the ROU asset also continues during the rent-free period. The effect is that the total cost of the lease is spread over the full lease term including the rent-free period.

Fixed annual escalation clauses (e.g., 2% per annum) are included in the lease payment schedule for IFRS 16 measurement. Each year's escalated payment is discounted to present value at commencement. This increases the lease liability compared to using flat payments. Variable escalation linked to an index (e.g., CPI) uses the current index rate at commencement. The lease liability isn't remeasured for expected future index changes, only when the actual index change triggers a payment adjustment (IFRS 16.42(b)).

At each reporting date, the lease liability is split between current (due within 12 months) and non-current (due after 12 months). The current portion represents the principal element of lease payments due in the next 12 months. The non-current portion is the remaining lease liability. This split is required for balance sheet presentation under IAS 1 and affects current ratio and working capital calculations.

Ciferi offers 20+ free audit and accounting tools, all browser-based with no login required. These include the Materiality Calculator (ISA 320), ISA 530 Sampling Calculator, ISA 570 Going Concern Checklist, Analytical Review Tool (ISA 520), Financial Ratio Calculator, Depreciation Calculator (IAS 16), IFRS 9 ECL Calculator, IAS 37 Provision Calculator, IAS 12 Deferred Tax Calculator, IAS 36 Impairment Calculator, Transfer Pricing Tool, and Intercompany Elimination Tool (IFRS 10). Visit our free tools hub at ciferi.com/free to see the full collection.

Under ISA 500, the auditor needs sufficient appropriate audit evidence for the lease liability. Key procedures include: independently recalculating the present value of lease payments (this calculator provides that), verifying the discount rate methodology against market data (ISA 540), testing lease population completeness by reviewing contracts and commitments, assessing lease term judgments for extension and termination options, verifying the accuracy of the amortization schedule, and checking the current/non-current classification at the reporting date.